Hilcorp starts operation of Marathon assets

After the close of a recent business deal, an oil and gas company has gained control of about 70 percent of Cook Inlet gas production and says it has eyes on increasing production to meet demand now and later.

As of Feb. 1, Hilcorp has taken over operation of almost all Marathon’s Inlet assets, save for an onshore drilling rig previously sold to Buccaneer, in a deal valued at $375 million. The sale included 17 million barrels of oil equivalent reserves across 10 production fields in the area, in addition to natural gas storage and interests in natural gas pipeline transmission systems.

Among the fields included in the deal are Ninilchik, Kasilof, Kenai, Cannery Loop, Beaver Creek, Wolf Lake, Trading Bay and McArthur River. Hilcorp amassed a total of 157 wells in the deal, of which 75 are actively producing. The remaining wells are shut in, said Lori Nelson, Hilcorp external affairs manager.

“We’re way excited,” said John Barnes, Hilcorp senior vice president of exploration and production in Alaska.

Barnes noted the company will continue to work the properties with “the same energy and diligence” they have put into assets acquired from Chevron in mid-summer 2011.

“It is a very good mix,” he said.

The closure was made possible when an Alaska Superior Court judge signed on Jan. 17 a consent decree, which is a legal document holding the company to do business in a certain way for a period of time.

“Because the (Federal Trade Commission) was involved with an informal investigation, this was the state’s way of satisfying their concerns over a non-competitive atmosphere and protecting the consumer,” Nelson said.

The consent decree includes a price cap at which Hilcorp can sell gas to utilities and industrial customers for five years and restrictions that prohibit the company from selling gas to liquefied natural gas export markets until utility demands are met, which will likely be for the whole term of the agreement, Nelson said.

The 2013 base gas price is set at $6.60 per mcf and increases each year to a final price of $7.72 per mcf in 2017.

Among the permitted local industrial uses include the Tesoro refinery and the small market created by the needs of the energy industry to power itself, namely at platforms predominately producing oil. The industry itself demands about 13 percent of all Cook Inlet production, according to state figures.

“We are still washing off the details of all that but overall we are going to be one of the major gas producers out of that basin and it is a responsibility we take seriously and one that we are also excited about,” Nelson said.

Hilcorp will also hire on several Marathon employees with local experience, she said.

“Some of their folks, I understand, took other opportunities, but we were able to hold on to 30-some with the local expertise,” she said. “Quite frankly we are happy to have them.”

The acquisition comes on the heels of news that Southcentral utilities face looming shortages of gas from the Inlet’s legacy fields while new exploration struggles to come online in time to bridge the gap. Nelson said the majority of Marathon’s holdings are gas fields, with the major asset being the Kenai Unit.

When asked if Hilcorp — a company known for turning around production at aging fields — could help with the gas shortage crisis, Barnes had a quick answer.

“We don’t buy assets to ride a decline curve down,” he said. “So we’ll work them hard and I think that the fact we acquired them kind of speaks for itself that we’re optimistic about what we can do with them and we’ll do that.”

Nelson said the company is “confident they can quickly add production” in fields they previously had joint ownership of with Marathon. Moreover, it will allow the company to evaluate unfamiliar fields, which is their “forte,” she said.

“It just kind of plays into more of these large-sized legacy assets Hilcorp has had success with year-over-year,” Nelson said.

Since January 2012, Hilcorp has seen a 160-percent increase in gas production among its fields, including the Deep Creek Unit, which has seen a 94-percent increase, according to information provided by Nelson.

Also since the start of 2012, the company has seen a total 448-percent net increase of oil production among four of its fields, most noticeably Swanson River, which saw a 390-percent increase.

Daily production with the acquisition, Nelson said, is about 35,000 barrels equivalent per day. Before, Hilcorp was producing about 20,000 barrels equivalent a day, she said.

The company is currently working with Southcentral utilities to determine future needs and Nelson said contract talks are in the works for the coming years.

Enstar spokesman John Sims said Hilcorp officials have already been in to see Enstar president Colleen Starring about what the utility’s gas needs will be.

“They are really stepping up to the plate, although we have not yet inked a new contact,” Sims said.

Even before the acquisition was final Jan. 31 Hilcorp had been able to supply significantly more gas under its existing contract than the company had been able to supply in December, Sims said.

There is still no overall change in Enstar’s view of the long-term shortage and the possible need to import gas, however. Sims said no decisions will be made, however, until the regional utilities complete their review of a study by Northern Economics, Inc., an Anchorage consulting firm, on possible gas import options.

“Our intent and our specialty is to come in and revitalize assets such as this,” Nelson said of the Marathon property. “We have already had some success in bringing on wells that were previously shut in. We’re going to turn every stone to make sure that we’re bringing every bit of production that’s available out of them.”